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5 February 2013

Why are IPOs overpriced?

If you are
reading this post, chances are that you have already burnt your fingers in IPOs. :-)

Do you remember
the days when you submitted your IPO applications thinking that you will sell your allotted shares on listing day for a handsome gain? But after listing,
prices never moved above the IPO price... Or worst still, they fell so much
that you decided never to invest in IPOs again. We all remember what happened
to Reliance
Power’s IPO, isn’t it?

Example of IPO overpricing : Reliance Power

So why it
is that IPOs are more of a losing proposition? Why is it that they say that the word IPO, does not stand for Initial Public Offering..

It stands
for…

It’s Probably Overpriced
(IPO)

:-)

You may say
that you made money in IPOs of Coal India, Mundra Port, Career Point, CARE
Ratings etc. We don’t deny it. Even we made a killing in a few of the IPOs.
But largely speaking, IPOs tend to be overpriced. And when we gave a thought to
it, it actually made a lot of sense.

Source : Google

If you give
a serious thought to why companies go for IPOS, you would understand that the whole
point of going for an IPO is to overprice the share offering!! The very purpose
of a company to do an IPO is to raise as much money as possible. They are
not here to do any favors to anyone. They need money and want to have as much
of it as possible. For a moment, let’s digress from the IPOs and assume that
you want to sell your house. You will try to get the maximum out of the buyer,
isn’t it? It’s natural. Everyone wants to get a better deal.

So if you
are an investor (or rather a trader looking for short term profit), and have
burnt your fingers in any of the recent IPOs, then you have only yourself to
blame. It’s because you have misinterpreted the primary purpose of an IPO.

Note –
Not all IPOs may be overpriced. You need to do you due diligence before
investing your hard earned money.